Understanding Cooperative Financials and Impacts to Your Farm

Transcription

1 Understanding Cooperative Financials and Impacts to Your Farm Production & Marketing Risk Seminar Iowa State Bank and Sac Realty & Insurance Sac City, Iowa January 23, 2018 Keri L. Jacobs, Asst. Professor and Extension Economist Iowa Institute for Cooperatives Endowed Economics Professor

2 Why (Co-op) Financials Matter to Producers o Co-op members are impacted by co-op financial performance via equity and patronage o Cash patronage changes per bushel net marketing o Producers who sell grain on credit sale contracts are unsecured creditors this holds for sales to co-ops and independents

3 Four Basic Conditions to Know About Your Co-op Is my co-op profitable? Does it have sufficient working capital to meet its obligations, including CSCs? How are we capitalized / leveraged? What is the company s allocation strategy?

4 Evaluating A Company's Financial Position before Selling Grain on Deferred Price Contracts: A Simple Calculator The following template will calculate the key financial indicators used to assess the financial position of a company for purposes of establishing a short-term credit relationship. Users can enter the values from a firm's recent audited financial statements in the yellow highlighted cells. Financial measures in table 1 of FMR 1893 are calculated automatically and displayed in the 'Output Values' table (below right). Please refer to that publication for an explanation of these values. START HERE: Is the firm you wish to evaluate a cooperative? Calculated value are formatted to indicate strength: green = above recommendation; yellow = at or near recommendation; red = below recommendation. Output Values From the Balance Sheet Measures Calculated Value Guideline Qualifier Assets Working Capital $0 $0 approx. minimum Current Assets Current Ratio #DIV/0! 1.0 varies Net Fixed Assets (NFA) Working Capital to Sales #DIV/0! #DIV/0! approx. minimum *intentionally blank* Leverage #DIV/0! 50% varies Liabilities and Equities Term Debt to NFA #DIV/0! 50% varies Current Liabilities Income to Sales #DIV/0! #DIV/0! approx. minimum Long-Term Debt Total Equity This file accompanies the publication, "Evaluating a Company's Financial Position before Selling Grain on Deferred Price Contracts" (FMR 1893) From the Operating (Income) Statement Grain Sales $- Author: Keri L. Jacobs, Assistant Professor and Extension Economist Total Sales $- Department of Economics *intentionally left blank* $- Iowa State University Net Income (Pre-tax) $- Last modified October 9, 2017 Iowa State University Extension and Outreach does not discriminate on the basis of age, disability, ethnicity, gender identify, genetic information, marital status, national origin, pregnancy, race, religion, sex, sexual orientation, socioeconomic status, or status as a U.S. veteran. Direct inquiries to Ross Wilburn, , wilburn@iastate.edu Evaluating a Company s Financial Position before Selling Grain on Deferred Price Contracts

5 Terminology - Profits Profits / profitability aka savings Local savings = gross margins + other operating income operating expenses Some of this is from member business, some from non-member business Net Savings (before taxes) = local savings + other income Income from regional cooperatives, joint ventures, etc.

6 Terminology Uses of Profits Patronage a return of profits based on use Allocation of the net savings before taxes from member business to members in proportion to each member s use in that year. Retained Savings (Earnings) retaining nonmember profits and designated portion of member profits; co-op pays the tax Dividends a return to equity Very few co-ops do this; dividends are to be subordinate to patronage

7 Terminology Designation of Patronage Qualified Patronage Allocation Min 20% must be paid in cash, the remainder is retained as allocated member equity, member pays the tax when the allocation is made (no tax liability at redemption) Non-Qualified Patronage No cash, all is retained as allocated member equity, co-op pays the tax when the allocation is made, member pays the tax when redeemed (and co-op receives tax deduction)

8 David Barton s Savings Distribution Tree Cash Patronage Refund to Members Qualified Member Pays Tax Allocated Member Equity Redeemed Later Allocated Member Non Qualified Tax Transfers Allocated Member Equity Redeemed Later Net Savings before taxes Unallocated Not Qualified Co-op Taxed Retained Earnings Non Member Unallocated Not Qualified Co-op Pays Tax Retained Earnings

9 Enterprise Mix - proportion of grain and non-grain sales matters to working capital and profitability Gross Margins what was made on marketing grain and resale of inputs Local Savings profits generated from the co-op s own operations. Patronage Received income from regional co-ops (CIPCO, CHS, LOL, AGP, CoBank), combination of equity and cash Sales Grain $110,898,520 $72,721,940 Farm Supplies $36,995,170 $40,077,100 Total Sales $147,893,690 $112,799,040 Cost of Goods Sold $140,314,000 $105,545,570 Gross Margins $7,579,690 $7,253,470 Other Income Service Income $5,527,810 $5,142,900 Finance Charges $702,040 $566,220 Total Other Income $6,229,850 $5,709,120 Gross Income $13,809,540 $12,962,590 Expenses Personnel Expense $4,497,100 $4,589,870 Fixed Expenses Interest $1,628,210 $1,758,740 Depreciation $1,813,240 $1,740,870 Insurance $261,130 $251,400 Property Taxes $504,100 $565,500 Variable Expenses $2,066,520 $3,338,980 Total Expenses $10,770,300 $12,245,360 Local Savings (Loss) $3,039,240 $717,230 Patronage Refunds Received $239,900 $477,700 Net Savings (Loss) $3,279,140 $1,194,930

10 Assets: Investments in Regional Co-ops This is the paper value of your coop s equity in the regional (e.g., CHS, AGP, LOL, CoBank, CIPCO, etc.) No control over when it is redeemed Lenders discount this when calculating borrowing ability This is net of newly allocated equity and the annual redemption (if any).

11 Payables ASSETS LIABILITIES Customer prepays and grain Current Assets Current Liabilities Cash payables on hand $1,542,630 $4,971,560 Accts Payable $1,887,010 $82,530 Accts These Receivable are the unsecured $5,792,150 $4,178,530 Operating Line $0 $0 Inventories $6,090,410 $4,697,820 Current portion of long-term note $1,420,000 $1,420,000 obligations of the co-op to Others $2,362,500 $777,560 Accrued Expenses $2,118,930 $2,945,680 Total producers Current Assets $15,787,690 $14,625,470 Total Current Liabilities $5,425,940 $4,448,210 CSCs not covered by the IA Fixed (Long Term) Assets Term (Long Term) Liabilities grain indemnity fund Land $1,751,110 $1,751,110 Mortgages / Term Notes $9,219,800 $7,799,800 Building & Equipment $35,245,720 $35,608,220 Member Notes $0 $0 Less: Accum Depreciation $13,930,270 $15,605,890 Total Long Term Liabilities $9,219,800 $7,799,800 Total Fixed Assets $23,066,560 $21,753,440 EQUITY Other Assets Common Stock $156,500 $156,500 Investments in Co-ops $8,774,160 $9,078,390 Deferred Patronage Refunds $24,046,010 $23,980,270 Retained Earnings $8,780,160 $9,072,520 Total Equity $32,982,670 $33,209,290 Total Assets $47,628,410 $45,457,300 Total Liabilities and Equity $47,628,410 $45,457,300

12 Equity ASSETS LIABILITIES Member-provided Current Assets Current Liabilities Cash Member on hand equity $1,542,630 capital $4,971,560 in Accts Payable $1,887,010 $82,530 Accts an Receivable individual s $5,792,150 name, will $4,178,530 Operating Line $0 $0 Inventories $6,090,410 $4,697,820 Current portion of long-term note $1,420,000 $1,420,000 eventually be paid back Others $2,362,500 $777,560 Accrued Expenses $2,118,930 $2,945,680 Total (redeemed) Current Assets $15,787,690 $14,625,470 Total Current Liabilities $5,425,940 $4,448,210 o Revolving equity (aka Fixed (Long Term) Assets Term (Long Term) Liabilities Age of Equity ) Land $1,751,110 $1,751,110 Mortgages / Term Notes $9,219,800 $7,799,800 Building o & Age Equipment of Patron $35,245,720 $35,608,220 Member Notes $0 $0 Less: Accum Depreciation $13,930,270 $15,605,890 Total Long Term Liabilities $9,219,800 $7,799,800 Retained savings not Total Fixed Assets $23,066,560 $21,753,440 allocated; permanent equity EQUITY Other Assets Common Stock $156,500 $156,500 Investments in Co-ops $8,774,160 $9,078,390 Deferred Patronage Refunds $24,046,010 $23,980,270 Retained Earnings $8,780,160 $9,072,520 Total Equity $32,982,670 $33,209,290 Total Assets $47,628,410 $45,457,300 Total Liabilities and Equity $47,628,410 $45,457,300

13 Local Equity ASSETS LIABILITIES Current The Assetsamount of equity that the co-op Current Liabilities controls Cash Calc: on hand Local Equity $1,542,630 = Total $4,971,560 Equity Accts Investments Payable in $1,887,010 Other Co-ops $82,530 Accts Receivable $5,792,150 $4,178,530 Operating Line $0 $0 Inventories $6,090,410 $4,697,820 Current portion of long-term note $1,420,000 $1,420,000 Others $2,362,500 $777,560 Accrued Expenses $2,118,930 $2,945,680 Potential issues of allocating more equity than is controlled Total Current Assets $15,787,690 $14,625,470 Total Current Liabilities $5,425,940 $4,448,210 Fixed (Long Term) Assets Term (Long Term) Liabilities Land $1,751,110 $1,751,110 Mortgages / Term Notes $9,219,800 $7,799,800 Building & Equipment $35,245,720 $35,608,220 Member Notes $0 $0 Less: Accum Depreciation $13,930,270 $15,605,890 Total Long Term Liabilities $9,219,800 $7,799,800 Total Fixed Assets $23,066,560 $21,753,440 EQUITY Other Assets Common Stock $156,500 $156,500 Investments in Co-ops $8,774,160 $9,078,390 Deferred Patronage Refunds $24,046,010 $23,980,270 Retained Earnings $8,780,160 $9,072,520 Total Equity $32,982,670 $33,209,290 Total Assets $47,628,410 $45,457,300 Total Liabilities and Equity $47,628,410 $45,457,300 13

14 IS MY CO-OP PROFITABLE?

15 Local Return on Sales Indicates degree to which coop is generating profits at the local level from its sales Calc: = Local savings Total sales =$.7 $112.8 = 0.6% Guideline: 1% of grain sales + 2.5% of non-grain sales

16 DOES IT HAVE SUFFICIENT WORKING CAPITAL?

17 Working Capital What happens to WC if this goes bad? Indicates availability of funds to meet current obligations in a timely manner Calculation: Current Assets Current Liabilities Grain guideline: seasonal operating line 5 7 times WC FS guideline: seasonal operating line 3 5 times WC Alternative (adjusted) Calculation: WC Sales = $10.2 / $112.8 = 9% Guideline: 7% of non-grain sales + 1.5% of grain sales 17

18 HOW ARE WE CAPITALIZED / LEVERAGED?

19 Local Leverage Indicates ability to meet long-term financial obligations Calculation: Long Term Debt Local Equity = $7.8 ($ $9) = 32% Guideline: < 50% (<0.50), but depends on revenues generated

20 Term Debt to Net Fixed Assets Indicates degree to which term debt is financing NFA and whether it matches life expectancy of assets collateralization factor Calculation: Long Term Debt Net Fixed Assets = $7.8 $21.7 = 36% Guideline: < 50% (<0.50), but depends on revenues generates from assets

21 WHAT IS THE ALLOCATION STRATEGY?

22 Equity ASSETS LIABILITIES How much equity is allocated to Current Assets Current Liabilities members? Cash on hand $1,542,630 $4,971,560 Accts Payable $1,887,010 $82,530 =$24.1 Accts Receivable $33.2 = $5,792,150 73% $4,178,530 Operating Line $0 $0 Inventories $6,090,410 $4,697,820 Current portion of long-term note $1,420,000 $1,420,000 Others $2,362,500 $777,560 Accrued Expenses $2,118,930 $2,945,680 Total Current Assets $15,787,690 $14,625,470 Total Current Liabilities $5,425,940 $4,448,210 Have they allocated too much was regional equity Fixed (Long Term) Assets Term (Long Term) Liabilities allocated Land (member $1,751,110 equity $1,751,110 Mortgages / Term Notes $9,219,800 $7,799,800 divided Building & Equipment by local $35,245,720 equity)? $35,608,220 Member Notes $0 $0 Less: Accum Depreciation $13,930,270 $15,605,890 Total Long Term Liabilities $9,219,800 $7,799,800 = $24.1 ($ $9.0) = 99.5% Total Fixed Assets $23,066,560 $21,753,440 EQUITY Other Assets Common Stock $156,500 $156,500 Investments in Co-ops $8,774,160 $9,078,390 Deferred Patronage Refunds $24,046,010 $23,980,270 Retained Earnings $8,780,160 $9,072,520 Total Equity $32,982,670 $33,209,290 Total Assets $47,628,410 $45,457,300 Total Liabilities and Equity $47,628,410 $45,457,300

23 Parting Thoughts Financials best viewed as trends over time Makes sense to know who you are doing business with (co-op or not) Overall, co-op financials still suggest strong balance sheets and available WC for shortterm deficits.

24 Keri L. Jacobs e: